We’ve covered supply chain finance (SCF) both on these pages, as well as in member research. It’s once again a topic of conversation with ongoing discussions about disruptions to supply chains. It also includes the need for working capital options among SMEs. Across the globe, there will be ongoing scrutiny as to the reach of such solutions.
Deep-Tier Supply Chain Finance
In this particular briefing article posted in Trade Finance Global the author explores what is referred to as “deep-tier” SCF. It means opening up further access to multinational corporates (MNC) and balance sheet lending deeper into the smaller tiers of supply chains. This is where SMEs reside. The author begins by relating to a tragic factory building collapse in Bangladesh a decade back. That incident shined some unwanted light on the MNCs role in creating supply chain pressures that ostensibly bypass ESG concerns. Multinationals in effect form anchors for the broader global supply chain and can influence further supplier investments in safer delivery of goods and services.
We will keep our comments limited to the SCF-related portions of the piece, which are certainly in line with what we have advised in the past. In effect the piece advocates pushing access to reverse factoring further into the long tail of corporate supplier spending. We see the frequently mentioned Asian Development Bank reference to the SCF gap for SMEs, which if readers follow an article link they can read further on that part, which is in the $1.5 to $2 trillion range according to ADB.
Reverse factoring is the issuing of short-term financial support for receivables based on the buyer credit rating, not the supplier. This form of financing provides liquidity to suppliers by receiving payments faster, albeit at discounted to invoice levels, typically negotiated beforehand. This is less dear than factoring, which can be expensive, especially on a sliding scale related to business size. The author’s point is that this is not new stuff, with SCF having grown substantially since the early 2000s. However, the advancing technologies of the past decade (blockchain, APIs, AI, etc.) are extending the availability and applicability of different types of financing to the often ignored business segments.
Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group.